The Norwegian sovereign wealth fund, the world’s largest, is keen to allocate more of its $ 1.3 trillion portfolio to outside asset managers, calling their performance “fantastic.”
The Oslo-based investor already raised its allocation target for outside managers at the end of last year to 5% from just under 4%. It will now “increase this figure somewhat”, Until 6%, according to Trond Grande, deputy managing director of the fund.
The model mainly applies to the fund’s equity portfolio in emerging markets and means that up to $ 80 billion will be managed by external asset managers.
“As long as the strategy is to use this to manage emerging market equities, there are also limits on the size of those markets,” Grande said in an interview on Wednesday. “Emerging markets make up about 10% of the equity portfolio, so there are natural limits as long as the strategy is what it is.”
Change of strategy
Grande spoke after the fund unveiled an update to its strategy in which it said its aim was to “focus on specific and delegated active strategies and less focus on allocation or top-down strategies ”.
The shift in focus comes as institutional investors around the world try to assess the likelihood of a sudden return of inflation that could upend their portfolio strategies.
Nicolai Tangen, a former hedge fund manager who has been CEO of the Norwegian wealth fund since September, said the potential resurgence in inflation could “derail” the current market. Determining when such a correction might come is “something that we look at a lot internally,” he said.
Things “have been going very well for a very long time,” he said. “But there are risks in these markets. Interest rates are low and inflation is currently low. The market has grown a lot, despite the fact that profits in many sectors actually declined during the crisis. There are no cheap sales in stock. “
Tangen has tried to prepare the wealth fund for any sudden volatility crisis, which has involved exposing its portfolio managers to some of the training techniques that help lead athletes to top performance. He says the idea is to make sure they’re able to cope with extreme stress without making bad investment decisions.
Part of the fund’s risk management will include stepping up research on so-called negative selection, which includes techniques such as forensic accounting. “Our aim is to widen our negative selection by underweighting stocks that we expect to underperform,” he said.
The fund, which generated $ 123 billion in returns last year, used a previous strategy update to shift its equity exposure to US stocks and out of Europe. Much of last year’s performance was driven by the fund’s holdings of US tech stocks.
(Add the fund’s 2020 returns and the reference to the switch to US stocks in the last paragraph, the value of the portfolio in the stock)